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Price of gold reaches record high

GOLDEN RUN: Record high prices of $NZ1169-$NZ1181 a troy ounce are not discouraging investors from piling their cash into gold.

Record high prices are not discouraging investors from piling their cash into gold.

It's often the way when economic apocalypse is on people's minds traditional investment wisdom says when central banks print money, buy gold.

At $US920-$US930 ($1169-$1181) a troy ounce, gold is not cheap. Its staggering price rise from less than $US300 in December 2001 has been driven largely by investors speculating that the world would once again turn to gold as a store of value in the face of geo-political unrest. Latterly a big factor has been fear of a rapid deterioration in the United States' economy, and by dint of that, the world's.

But while gold may not look cheap, at least in US dollar terms, it's not hard to find those who think the price can top $US1000. There are even those who think $US5000 is not impossible, says Mark Sutton, head of the New Zealand Mint, a private business which produces bullion coins and bars for New Zealand investors. Greg Canavan, from share tipster and fund manager Fat Prophets, has been telling clients here and in Australia to buy gold for years.

"We have had a very strong gold view. We have been advising our members to get exposure to gold for a number of years. Even though the prices have risen, the fundamental case for gold is very strong," Canavan said, although he warned there would be some ups and downs, which could leave latecomers disappointed in the short term.

"It comes down to the fact that the US authorities are looking at pumping another round of economic stimulus into the economy, lowering interest rates and creating additional supplies of US dollars, which we think will eventually lead to a big pickup in inflation around the world, and gold is a way of protecting your purchasing power."

In other words, attempts to save the US economy will end up eroding the value of the assets investors around the world hold, and gold, of which there is only a limited amount, is the insurance policy against that.

Does it work as a store of value?

The answer seems to be yes. At the conclusion of the American War of Independence in the 1780s, one troy ounce of gold would have paid for a high quality man's suit. The same is true today. A tougher question to answer is why. The answer seems to be that gold is valuable because everybody believes it is valuable. Economists may deride the fact, but Sutton calls it a core belief that the world continues to see gold as the absolute currency.

That's not to say that at all points in time gold will hold its value. Those who bought gold in 1980 when it was selling at more than $US800 would have found that 20 years later, it would have been worth just $US275.

The rationale behind gold's slump then is easy to fathom. After a big speculative run on gold, based on fears of economic deterioration, once the world economy picks up, who would stick their cash into gold when they can get regular income from investing in shares or bonds?

It's not just fund managers who have had a penchant for the glittering stuff. Financial planner and Sunday Star-Times columnist Peter Hensley began investing a portion of his clients' growth portfolios in gold back in late 2001, when he thought global share markets were hugely overvalued.

Then gold was worth around $US300 a troy ounce.

And he believes that investors have seen nothing yet.

"I believe we are not yet through uncertain times [in the world economy] and that we are in the early stages of a bull market in gold. The wider public has not yet entered the market, and once they do, you will see greater interest and demand."

That, he says, will drive up prices, although the issue will be when to liquidate, because history shows gold has its day, and at times is subject to a speculative bubble, which he has little doubt will eventuate.

The rise of exchange traded funds tracking gold will have a big impact on this, Hensley believes. Not only does that further weaken gold suppliers' ability to manipulate price, but takes the future of gold prices further away from being governed by supply and demand, and into the hands of investor sentiment.

But Hensley says he plans to tell clients the moment he decides to sell out of his own positions.

If you are buying gold as a speculative, growth investment, the real stuff is a bit of a hindrance, so many argue it's better for the average person to hold a financial instrument to get their exposure.

Physical gold pays no regular income and it can actually cost money. Those willing to bury it in the garden, or hide it in the house, won't have to pay for a safety deposit box at the bank, although it will probably see their household insurance premiums rise.

There's also a premium that investors have to pay dealers like the New Zealand Mint, which charges roughly 6% on sale and 1% to buy it back. Compared to a bank deposit today, those holding physical gold have to see it appreciate by at least 8% plus the costs of storage and insurance, plus a portion of those margins, before they would have beaten keeping their money in the bank.

Hensley uses Perth Mint Quoted Gold Products (QGP), which are tradable warrants listed on the Australian stock market, which track the gold price, and are backed by real deposits of gold, though only cost a sharebroker's fee to buy, and an annual fee of 0.333% a year. They are an efficient way to buy gold, says Hensley, and positions can be liquidated at any time without the investor having to pay high margins.

The Perth Mint is also underwritten by the state government, which provides an extra level of security, says Hensley.

Sargon Elias from broker CMC Markets, who believes gold will punch through the $US1000 level, says gold trades top all others on the firm's dealing system as speculators use contracts for difference (CFDs) to take a flutter on gold. Most are betting on gold prices to go higher, which Elias says is down to the fear factor of recession emerging in the US. "People are buying it because it is seen as a safe haven," he says. "When there's a geopolitical crisis, gold goes up."

Why limit yourself to just one shiny precious metal? CFD investors can speculate on gold's poorer sister silver or copper or aluminium, uranium, platinum or palladium.

Elias says those trading copper, which is hugely volatile, would be taking huge risks.

Aluminium is also a difficult bet. As it takes so much energy to produce, prices tend to be impacted heavily by the cost of energy, and less speculator sentiment.

But Elias says silver, though less popular with traders, does tend to trade in tandem with gold, and might be worth a bet, but it attracts less of a fascination for investors.

Canavan agrees, although buying it is harder.

"In the later 1900s, when silver was a substitute for money, the ratio of its value to gold used to trade at 16:1. In the last hundred years, silver has been demonitised, and the ratio is around 50:1. If you think that silver could once again be considered as a store of wealth, then that ratio will narrow."

His personal belief: "I think it is undervalued."

Consequently, Fat Prophets recommends the Coeur D'Alene Mines Corporation, the world's largest silver producer, listed on the New York Stock Exchange.

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